by Tom Taulli | September 19, 2013 1:09 pm
Shares of Caesars Entertainment (CZR) were banged around yesterday to the tune of about 9%, and while that still leaves the stock up more than triple for the year-to-date, investors should be awfully cautious.
Caesars is cruising on a boat of dicey finances.
The source of most of the issue goes back to 2006, when CZR went private in a whopping $31 billion leveraged transaction. The timing was horrible considering the bubbly valuations of buyouts, and CZR had to take on an enormous debt load.
That long-term debt sat at $23.5 billion as of June 30. Meanwhile, CZR is worth only $3 billion as measured by market capitalization.
In an attempt to work itself out, Caesars is looking to refinance roughly $4.85 billion of its debt, which will involve the issuance of more bonds and notes. And it involves a bit of financial engineering. Per Bloomberg:
“Caesars is refinancing debt through the Caesars Entertainment Resort Properties at the PropCo unit, with most of its more than $23 billion of debt held by the operating company, or the OpCo. The move signals its parent’s plans to shift assets away from lenders at the OpCo in the case of a bankruptcy, according to Fitch Ratings analyst Alex Bumazhny.
With the closing of the refinancing transaction, Caesars will shift the equity interests of subsidiaries that own properties such as the Octavius Tower at Caesars Palace Las Vegas and ‘Project Linq’ to another unit, which will be an issuer under the new financing, according to the filing.”
However, the financial engineering won’t erase the debt — instead, CZR will be pushing back the maturities on the existing debt, which should provide some breathing room. The asset transfer also will help to provide some protection in the event of a bankruptcy filing.
The move is further made necessary by CZR’s core business, which is far from robust. In the latest quarter, CZR’s revenues were flat at $2.2 billion, and adjusted EBITDA fell by 8.2% to $470.5 million.
The onerous debt load has made it difficult for CZR to invest in its operations. At the same time, the company missed out on the mega-opportunities in Macau, which has continued to experience standout growth rates. Instead it has been companies like Las Vegas Sands (LVS) and Wynn Resorts (WYNN) that have taken the spoils.
CZR does own attractive online gaming assets including the World Series of Poker, the brand under which Caesars is launching real-money online gambling today. But as InvestorPlace.com’s Will Ashworth has pointed out, the company has stowed away them in a subsidiary called Caesars Growth Partners LLC (CGP), another move made to deal with a potential bankruptcy.
Caesars’ moves are the prudent thing to do, but they’re certainly not anything that investors should be salivating over — especially amid CZR’s massive run-up.
Yes, perhaps the company will stave off a bankruptcy filing, but if CZR can’t boost its revenues (which seems likely), these maneuvers might not mean much. That’s especially true for common shareholders, who are last in line to receive anything in a bankruptcy. And should CZR go under, you can bet the creditors will leave little behind.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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